United Kingdom

United Kingdom

A dire start that got gradually better

1 February 2004

The introduction of new electricity trading arrangements (NETA) for England and Wales caused a furore in the renewables and combined heat and power industries in the months after NETA came into force in March 2001. The problem for renewables revolved around the balancing mechanism at the heart of NETA that penalises generators when their output does not match their offer exactly. In particular, this hit small and intermittent generators like wind farms.

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Among the hundreds of fixes to Britain's New Energy Trading Arrangements have been amendments to greatly lessen the penalties associated with settling wind's deviations from scheduled production on the balancing market

The introduction of new electricity trading arrangements (NETA) for England and Wales caused a furore in the renewables and combined heat and power (CHP) industries in the months after NETA came into force in March 2001. The problem for renewables revolved around the balancing mechanism at the heart of NETA that penalises generators when their output does not match their offer exactly. In particular, this hit small and intermittent generators like wind farms.

Output from renewable generators fell by around 25% and revenues fell by over 33%. Volatility in the power market in those early days with a high spread of prices meant that generators had to pay a high "system buy price" to make up shortfalls, while they received only a low "system sell price" for excess power. For months, some small generators could not find an electricity supplier willing to buy their power and incur the imbalance charges.

After that low point things could only get better. Two particular modifications to the rules governing the balancing mechanism -- the balancing and settlement code (BSC) -- improved matters for small generators. Reducing the period to gate closure, the time between notifying an offer of power and its later dispatch, from 3.5 hours ahead to just one hour ahead, and reducing the spread of system buy and sell prices have both combined to lower exposure of intermittent generation to imbalance charges.

Welcome though these modifications were, their effect on renewables pales when compared with that of the UK renewables obligation (RO), introduced in April 2002, which transformed the market for wind power. The RO requires electricity suppliers, known elsewhere as retailers, to supply a percentage of their power from renewables, starting at 3% in 2002-03, rising to 15.4% in 2015/16. Where once suppliers were reluctant to contract for wind power, they now vie to buy up wind generation, since the imbalance costs of wind are more than outweighed by the income gained through sales of the associated renewables obligation certificates (ROCs) and Climate Change Levy exemption certificates (LECs). Nearly all renewable electricity is sold directly to suppliers who add it to their energy portfolios, where the effect of any imbalances from individual projects is reduced through aggregation.

But while the RO cushions renewables from the effects of NETA, its problems have not gone away. "We still have a system which inherently works against smaller, intermittent and green generation," says Syed Ahmed from the Combined Heat and Power Association (CHPA). He points to the demise of large generator and supplier TXU as proof that no one is immune from the triple whammy of lower wholesale prices for power, imbalance costs, and loss of benefits for embedded generation in today's electricity market. "The big guys have been suffering, and smaller players have been suffering disproportionately more," he says. "The only people who are building new capacity are wind developers because they have the RO."

Fighting for a say

There is still room for improvement of NETA, says Ahmed, but changes will only come about if one of the signatories to the BSC -- who are mostly large players -- proposes a modification. This is then considered by the BSC panel and energy regulator Ofgem. A number of proposed modifications to help small generators have been rejected. "The problem is that NETA is a big boys' playing field," he says. "We have a very difficult time engaging our members in the NETA process because it is all so complex."

From Ofgem, Boaz Moselle claims the modifications already introduced have helped smaller intermittent generators. But if the balancing rules are still unfairly penalising them, Ofgem will consider further changes to the BSC, he says. "The aim is to have cost reflective charges and if we could see anything to make them more cost reflective, we would consider it." He points out, however, that intermittent sources such as wind can lessen their exposure to imbalance charges by pooling their output in a portfolio of generation, although he concedes that few renewable generators have so far opted to use consolidation services.